NBFC Registration: An Overview

NBFC stands for Non-Banking Financial Company which is a company registered under the Companies Act, 2013, engaged in the business of providing loans & advances, acquisition of shares/stocks/bonds/debentures/securities issued from the government or the local authority or other marketable securities of similar nature, leasing, hire-purchase, insurance business, and chit business. 

However, those institutions whose principal business is that of agriculture activity, industrial activity, purchase or sale of goods (other than securities) or providing any services and sale/purchase/construction of the immovable property are excluded from the definition of NBFCs.

Moreover, a Non-Banking Financial Company also refers to a company having the principal business of obtaining deposits under any scheme of arrangement in a lump sum or installments through contributions or in any other manner, is also a non-banking financial company (like Residuary Non-Banking Company). Hence any non-banking institution desirous of engaging in such activities should apply for NBFC Registration.

Growth of NBFCs in India

The key factor for the NBFC's success includes customised and personalised loan product, quick processing and a customer-friendly credit policy. NBFC will continue to maintain its growth if the following factors are widely executed in the business.

• Customised Loan Product
• Personalised Customer service
• Use of Digital channels to increase reach
• Improved and high-level Risk management tools

Types of NBFCs

NBFCs can be categorised -

• On the basis of their activity;
• On the basis of liabilities. 

NBFCs, based on their activity

Investment and Credit Company-

A company that does its principal business-asset finance by giving finance is termed an Investment and Credit Company. 

Mortgage Guarantee Company-

Mortgage Guarantee Company refers to financial institutions for which a minimum 90% of the business turnover is mortgage guarantee business or where a minimum 90% of the gross income is from mortgage guarantee business, and the net owned funds are 100 crore rupees.

Infrastructure Finance Company-

An NBFC deploys a minimum of 75% of its total assets in the infrastructure loans and has a minimum net owned funds (NOF) of 300 crore rupees and a CRAR of 15%.

Non-Operative Financial Holding Company (NOFHC)-

It is a type of financial institution that enables a promoter group of promoters to set up a new bank. It is a wholly owned NOFHC that holds banks and other financial services companies regulated by Reserve Bank or other financial sector regulators to an extent permissible under the applicable regulatory prescription. 

Micro Finance Company-

A Micro Finance Company does the same functions just as banks do. They extend loans to small businesses that are underserved or are non-qualified to obtain loans.  

Housing Finance Company

HFCs or Housing Finance Companies are NBFCs, with their principal business being financing the acquisition or construction of houses.

NBFCs, based on their Liabilities

• Deposit-taking NBFCs;
• Non-Deposit Taking NBFCs.

Non-deposit-taking NBFCs are further classified into-

• Systematically important NBFCs;
• Others

Role of NBFCs in India

In a nutshell, NBFCs have played a massive role in the development of the Indian economy in the following ways:

• Mobilising resources;
• Capital formation;
• Employment generation
•  Drawing foreign grants;
•  Providing long-term credit and specialised credit;
• Ushering in finance to the country;
• By deploying cutting-edge technology to make financial services accessible and affordable to all;
• Acting as an alternative to banks, it provides various services, from helping in investing in property and trading money market instruments to funding private education, among others.

Pre- Requisites for NBFC Registration 

The following conditions should be met before an NBFC is registered:

• Firstly the financial institution desirous of obtaining NBFC Registration should be established as a company under the Companies Act 1956/2013;
• Secondly, a minimum of 1/3rd of the Directors should hold a minimum of 10 years of experience in finance, and such person should be employed as a full-time Director;
• The applicant company should have a detailed business plan for the next 5 years;
• The company needs to maintain a net-owned fund to obtain the registration. Currently, the company is required to have a net-owned fund of 2 crore rupees; however, slight changes have been made after the RBI's introduction of the scalar-based regulation. (Note- You can find the revised net owned fund requirements below);
• The CIBIL score of the company, its directors and its members should be acceptable, which would mean they don't have any record of default in paying loans;
• The object clause specified in the Memorandum of Association must be in-line with the business plan;
• The directors should meet the fit and proper criteria.

Documents required for NBFC Registration

The following documents should be kept ready:

• Company Incorporation Certificate;
• Detailed information on management along with company brochure;
• Copy of PAN/Corporate Identity Number (CIN) of the company;
• Documents of the location/address;
• A Certified copy of the Memorandum of Association & Articles of Association;
• List of Directors' profiles which should be duly signed;
• Qualification certificate of directors as well as their experience certificate;
• CIBIL/credit reports of the Directors of the Company;
• Board resolution on ‘Fair Practices Code’ and a certified copy of the same;
• Certificate issued from the statutory auditor declaring that the company doesn’t hold any public deposit and does not accept it;
• Certificate specifying owned funds on the date of the application from a Statutory Auditor;
• Shareholder KYC, CIBIL report, ITR and banker report;
• Furnish information on the bank account, balances, loans, credits, etc.;
• Audited balance sheet as well as P&L statement with the directors and auditor’s report of the last three years;
• Self-certified copy of bank statement and ITR;

NBFC Registration Procedure

The process for the registration of NBFC is given below – 

Arranging the Documents

It is important for the applicant to arrange all the relevant documents required to initiate the process of NBFC Registration.

Filing the Application with RBI 

After arranging the relevant documents, the applicant must file the application with the authority.

Submission of Application and Documents for Verification 

The next step is the submission of the application along with the necessary documents by the applicant for the purpose of verification by the authority.

The authority will verify the documents and application to check the accuracy of the submissions made by the applicant. 

Issue of Registration Certificate 

After successfully verifying the application and documents, the authority will issue the registration certificate. 

Revised Categorisation of NBFCs

As per the revised framework, RBI has notified 4 scale-based layers to regulate NBFCs, i.e. Base layer, Middle layer, Upper layer and Top layer.

Scalar Based Regulatory Framework for NBFCs- 2021

On October 22, 2021, the Reserve Bank of India announced a scale-based revised regulatory framework for NBFCs with a view to having a tight oversight of the sector. As per the scale-based regulatory framework for Non-Banking Financial Companies, there will be more categories of NBFCs as per their activity with stringent rules.

The key highlights of the revision are as follows:

• There will be a ceiling of 1 crore rupees per borrower for financing subscriptions to IPO.
• The regulatory structure of the NBFCs will include 4 layers: 
• Base Layer- Comprising non-deposit taking NBFCs below asset size of 1000 crore rupees; 
• Middle Layer- Comprising all deposit-taking NBFCs, non-deposit-taking NBFCs with an asset size of 1000 crore rupees and more; 
• Upper Layer- The top 10 eligible NBFCs in terms of asset size will reside in this layer; 
• Top Layer- This layer can get populated if the regulator believes that there is a substantial increase in potential risk from specific NBFCs in the upper layer.
• The net owned fund requirement will be hiked for all NBFCs to 10 crore Rupees with certain exceptions-

• The net owned fund requirement will be hiked for all NBFCs to 10 crore Rupees with certain exceptions-

• In the case of NBFC P2P, NBFC AA and NBFC without public funds and no customer interface, the net owned fund will be 2 crore rupees.

•  In the case of NBFC P2P, NBFC AA and NBFC without public funds and no customer interface, the net owned fund will be 2 crore rupees.
• NBFCs will be required to recognise loans overdue for more than 90 days as NPAs by March 2026 and over 150 days by March 2024.

Note: These guidelines will be effective from 1st October 2022. Further, the instructions related to the ceiling on IPO funding shall come into effect from 1st April 2022.

Cancellation of NBFC Registration

The business owner must be aware of certain grounds that may result in NBFC Registration cancellation. Some of the grounds have been specified below-

• If an NBFC fails to carry on the business activity of an NBFC
• If the NBFC fails to meet the requirements or conditions specified under the act and any other compliance as required by the RBI, like capital requirements
• In case an NBFC fails to meet or adhere to the directions issued by the RBI from time to time. 
• If an NBFC fails to maintain books of accounts or records as required by RBI Act 1934 or fails to submit the books of accounts, records and any other relevant documents to the RBI inspection purposes
• If the NBFC is unable to repay its deposits, then its registration may be cancelled however the RBI shall provide such NBFC with an opportunity to clear its stance before effecting an NBFC registration cancellation, as there may be a case where it is found that NBFC has a poor financial condition to able to repay deposits.